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🏦 CRR, SLR, Repo Rate & Reverse Repo Rate Explained
Chapter 3 – RBI’s Control System | Banking & Loan Series by Onetrader
💡 Introduction
Have you ever noticed that when RBI changes interest rates, home loans, EMIs, FD rates, and even stock markets react immediately?
That’s because RBI doesn’t control banks directly.
Instead, it uses powerful financial tools to control money flow, inflation, and credit growth.
Those tools are:
- CRR (Cash Reserve Ratio)
- SLR (Statutory Liquidity Ratio)
- Repo Rate
- Reverse Repo Rate
Understanding these is like understanding the remote control of India’s economy.
This is Chapter 3 of the Banking & Loan Series by Onetrader.
🔹 1. Why RBI Needs Control Tools
Banks can create money through loans (as you learned in Chapter 2).
If left uncontrolled:
- Too many loans → inflation
- Too few loans → economic slowdown
So RBI’s job is to:
- Control how much banks can lend
- Control how expensive loans become
- Maintain financial stability
CRR, SLR, Repo & Reverse Repo are the levers RBI uses.
🔹 2. What Is CRR (Cash Reserve Ratio)?
📌 Definition
CRR is the percentage of a bank’s total deposits that must be kept with RBI in cash.
Banks cannot lend this money.
Banks do not earn interest on this money.
📊 Example
If a bank has ₹100 crore deposits
CRR = 4%
➡️ ₹4 crore must be kept with RBI
➡️ Only ₹96 crore can be used for lending
🎯 Purpose of CRR
- Reduce excess money in the system
- Control inflation
- Ensure banks always have liquidity
📉 CRR Up or Down?
- CRR ↑ → Less money for loans → EMIs costly
- CRR ↓ → More money for loans → Economy boosted
CRR is a direct brake on banks.
🔹 3. What Is SLR (Statutory Liquidity Ratio)?
📌 Definition
SLR is the percentage of deposits that banks must invest in:
- Government bonds
- Treasury bills
- Gold
These are safe assets, not cash.
📊 Example
Deposits = ₹100 crore
SLR = 18%
➡️ ₹18 crore invested in govt securities
➡️ Remaining money used for lending
🎯 Purpose of SLR
- Ensure bank safety
- Encourage govt borrowing
- Prevent reckless lending
Unlike CRR, banks earn interest on SLR investments.
⚖️ CRR vs SLR
| CRR | SLR |
|---|---|
| Kept with RBI | Invested in govt securities |
| No interest | Earns interest |
| Cash only | Bonds, gold, securities |
| Strong control | Moderate control |
🔹 4. Repo Rate – The Most Powerful Tool
📌 Definition
Repo Rate is the interest rate at which banks borrow money from RBI.
When banks need short-term funds, they go to RBI.
📊 Impact
- Repo Rate ↑ → Bank borrowing expensive → Loan rates ↑
- Repo Rate ↓ → Bank borrowing cheap → Loan rates ↓
That’s why:
- Home loan EMIs move
- Business loans change
- Stock markets react
🧠 Why Repo Rate Matters Most
Because it directly affects:
- Bank cost of funds
- Lending rates
- Consumer EMIs
- Economic growth
This is why news channels scream:
“RBI hikes repo rate!”
🔹 5. Reverse Repo Rate – Parking Money with RBI
📌 Definition
Reverse Repo Rate is the rate at which banks deposit excess money with RBI.
When banks don’t want to lend, they park money safely with RBI.
📊 Impact
- Reverse Repo ↑ → Banks lend less → Money tight
- Reverse Repo ↓ → Banks lend more → Money flows
RBI uses this to:
- Absorb excess liquidity
- Control inflation
- Stabilize short-term interest rates
🔹 6. How RBI Uses These Tools Together
RBI never uses one tool alone.
It uses them in combination, depending on the situation.
🔥 Inflation High
- CRR ↑
- Repo Rate ↑
- Reverse Repo ↑
➡️ Loans costly
➡️ Spending reduces
➡️ Inflation cools
🚀 Economy Slow
- CRR ↓
- Repo Rate ↓
- Reverse Repo ↓
➡️ Loans cheaper
➡️ Businesses borrow
➡️ Growth accelerates
🔹 7. How This Affects Common People
🏠 Home Loans
- Repo rate ↓ → EMIs fall
- Repo rate ↑ → EMIs rise
💳 Credit Cards & Personal Loans
- Become costlier faster
- Interest rates jump quickly
💰 Fixed Deposits
- High repo → FD rates increase
- Low repo → FD returns reduce
So even if you never follow RBI news —
RBI decisions affect your daily life.
🔹 8. Onetrader Insight: Why Rich Track RBI Closely
Big investors, institutions, and corporates track RBI policies very closely because:
- Cheap money = opportunity
- Expensive money = caution
They borrow when rates are low
They slow down when rates are high
That’s why understanding RBI tools gives you an edge.
💬 Onetrader View
RBI doesn’t print money randomly.
It balances growth and stability using CRR, SLR, Repo & Reverse Repo.
Once you understand these tools:
- You understand why EMIs change
- You understand market cycles
- You stop panicking during rate hikes
This is how you move from being a financial user to a financial thinker.
⚡ Next Chapter Preview
📘 Chapter 4: Public vs Private vs Cooperative Banks – Key Differences
We’ll decode:
- Why SBI behaves differently from HDFC
- Why private banks grow faster
- Why cooperative banks face problems
❓ Frequently Asked Questions (FAQs)
1️⃣ What is CRR in simple words?
CRR is the portion of deposits banks must keep with RBI in cash and cannot lend.
2️⃣ What is SLR used for?
SLR ensures banks invest part of deposits in safe government securities.
3️⃣ Why is repo rate important for EMIs?
Repo rate decides banks’ borrowing cost, which directly affects loan interest rates.
4️⃣ Does RBI control banks directly?
No. RBI controls money flow indirectly using these policy tools.
5️⃣ Which RBI tool is most powerful?
Repo Rate — because it directly impacts loans, EMIs, and markets.